SIS CREDIT - BULGARIA: BALANCE BETWEEN SOCIAL IMPACT AND PROFIT

Martina Grigorova | Head of Business Lending and International projects

SIS Credit is leading microfinance institution in Bulgaria. The company is providing loans up to EUR 25000 to start-ups, micro enterprises and agricultural producers. The mission of SIS Credit is to encourage the entrepreneurship and to grant access to funding to those clients with limited ways to finance themselves and to support the creation of new jobs in the depressed economic regions in Bulgaria. SIS Credit has an institutional rating BB- with stable outlook set by the international rating agency MICROFINANZA Rating.

SIS Credit is member of European Microfinance Network and Microfinance Centre. The company is among the first European institutions that signed the European Code of Good Conduct for Microcredit Provision launched by the European Comission. The institution is also one of 15 selected MFIs to participate in a publication of European Microfinance Network named European Good Practices in rural microfinance. Recently the company- shareholder of SIS Credit has become a member of CONFINDUSTRIA Bulgaria. In 2017 SIS has launched a project to support Italian micro enterprises that want to start business in Bulgaria by providing them funding and consultancies, as well as Bulgarian clients who want to develop export of production to Italia. For more information, please contact our relationship manager for Italy- Ms. Dari Grillini, e-mail: Questo indirizzo email è protetto dagli spambots. È necessario abilitare JavaScript per vederlo.

Core idea of microfinance

Initially microfinance had limited definition - provision of micro loans to the poor entrepreneurs. The core idea of microfinance was providing small amounts (e.g. 100 $) to poor people in underdeveloped economies. Thus, microfinance was considered as a tool to lift people from poverty and promote financial inclusion. These loans have been provided mostly by nonprofit organizations, because the social aspect has been considered as risky initiative for a traditional, for-profit company. Step by step the benefits of microfinance extended beyond the direct effect of giving people a source for capital. Entrepreneurs who create a successful business, create jobs, trade and overall economic improvement. Thus, microfinance couldn’t be considered only as a tool for “assisting the poor”, but for mechanism to support entrepreneurs with business ideas and boost the economic growth. This exactly is the opportunity for microfinance development- supporting start-ups and microenterprises that are in the position to generate income for themselves, for the MFI and for the economy in the same time.

Could microfinance be profitable and in the same time preserve the social idea?

ike conventional lenders, microfinance institutions (MFIs) must charge interest on loans. Here comes the question- how to cope with the high-risk profile of clients (to minimize losses for MFIs), to generate profit to be sustainable and in the same time not to drift from the social mission. Interestingly, even though the borrowers often qualify as financially excluded, repayment rates on microloans are often higher than the average rate on more conventional forms of financing. For example, the microfinancing institution Opportunity International reported repayment rates of approximately 98.9% in 2016.

Moreover, because of this new understanding that microfinance could be profitable, many nonprofit organizations (NGOs) have started becoming for-profit MFIs. And this doesn’t mean that they are not social any more, but means that they are not relying on grant funding and charity initiatives to be capable to do microfinance. Nowadays MFIs could operate more efficiently, and attract more capital by relying on profit-seeking investors. In fact, by becoming a profitable business, a MFI could extend its reach, providing more loans to the low-income or just neglected by conventional banking system applicants.

Price- how much is too much?

In the world of Microfinance many new trends have been developing over the last years. Companies have seen that it is very realistic to make a profit using microfinance in low income areas. This has caused an emerging trend of for-profit MFI’s to enter the microfinance space, mainly by providing fintech solutions and easy loan approval. Since for-profit MFI’s have a larger incentive to make money, they often charge higher interest rates and can become stereotypical loan sharks. So here comes the biggest question- how much is too much, or what is the price on micro loan that is not excessive, but in the same time allows MFIs to be sustainable. The pricing structure is considered as “the Pandora’s box” in microfinance, because there is no single position on the topic- when a forprofit MFI becomes a financial shark. The truth is that it is not a question of numbers, but of price composition and more specific- on the profit margin.

Responsible lenders, like SIS Credit, review and evaluate its pricing policy on a regular basis. It is updated as often as needed to be adequate to broad market developments and competition. Finally, the company adjusts the interest rates it charges on its loan products in a way that ensures that it will be able to cover its cost of operations and to be able to fund its growth. In SIS Credit there is an established framework for pricing of various loan products. Interest rates are determined based on 4 components:

1) Overall cost of funding;

2) Operational expenses, including delivery costs;

3) Expected loan losses in reliance to risk profile of clients;

4) Desired profit margin.

The fourth element is the most important one for determining the business model of a company- the responsible MFI is not committed to profit maximization and should reinvest profit in business, but still- it should be on profit.

SIS Credit aims to fill the gap left by the traditional commercial banks in financing of micro- and small companies. By being flexible and taking the business specific into consideration, the company is able to provide financial services to clients that are often neglected by the banks but have a sound business idea and good potential for growth. This is possible only because of the additional business development services (BDS) that give knowledge and opportunity to clients.

SIS Credit understands that provision of BDS plays crucial role in the business model of MFIs. Our experience has shown that many entrepreneurs who want to start their own business are not able to elaborate their projections and strategy. That’s why SIS Credit provides not only loans, but also BDS like: elaboration of business plan, legal advices, tax and accounting advices, assistance in applying for EU funding, etc. Moreover, SIS Credit is organizing free-of-charge educational seminars in smaller towns in Bulgaria. These additional services are free-of-charge, but of course, should be included in the overall price composition described above.

As a conclusion, apart from being social and creating benefits to clients, the MFI should keep sufficient return rate and be efficient as enterprise which allows the sustainable development of microfinance sector. This is a good model that ensures happy clients and happy investors.